In the case of Gary v. Citizens Bank of Middletown, a court would find in favor of the bank.
Under the UCC 3-401 and 4-406 , Gary substantially contributed through his negligence to the theft and subsequent forgeries. Gary also had a duty to exercise reasonable care and promptness in examining the statement to discover any forgeries and report them to the drawee bank.
Gary did not meet either and subsequently lost his standing to claim negligence for payment of forged checks. However, the bank could be liable to the extent that its negligence substantially contributes to the loss on the first forged check.
Failure to discover and report a forged check releases the drawee bank from liability for all additional forged checks in the series written after the thirty-day period. Therefore, Gary's failure to discover the May forged check by June 30 relieves the bank from liability for the June 20 check of $1,000.
If the law was changed to allow personal defenses to be successfully raised against holders in due course the person(s) in the worst position to understand and defend against new issues raised against their lawful possession of an instrument.
It would be less fair for a holder in due course to be denied the opportunity to collect payment. The burden falls on the party that was in the best position to prevent the loss. In all cases that is the most fair.
The change would negatively impact the legal process as well as commerce because there would be no guarantee that a holder in due course had actual legal rights to an instrument. Every possession would be called into question and commerce would slow to a crawl and eventually stop.
According to this section; a customer can stop the payment of its check by making a written order. The order is effective for following time periods:
1) When the order is in written form; it is effective for six months.
2) When the order is in oral form; it is effective for 14 days. Within this time period, the order should be confirmed in written.
R should have taken following steps to prevent the cashing of the check:
1) It should have been renewed the stop payment order for next six months.
2) The bank should have considered the check as the stale check.
3) R should have asked the S Company for not cashing the check. Since, R did not contact the S Company after issuing check; the company did not know about the stop order.